As long as the paychecks are coming on time, the majority of American workers don't think much about how they are paid. A 2013 analysis found that more than 96 percent of Americans are paid via direct deposit, which marked the last real innovation in the payroll world when it was introduced in 1974. Now, though, as employers look to cut costs and make accessing funds more convenient for their workers, one method, the payroll card, has become increasingly popular.
According to a 2015 study, more than 7.4 million American employees were paid via a payroll card last year, with that number moving up to 8.7 million in 2016. These cards, which resemble a traditional debit card in a number of ways, can be used by companies to load and deliver an employee's paycheck electronically, foregoing the expense and effort of cutting a paper check.
With many servers making the $2.13 tipped minimum wage, payroll card fees impact a higher percentage of their income.
Payroll cards are particularly appealing for people who don't have a bank account, due in large part to the predatory fees charged by check cashing companies. With a payroll card, an employee can avoid the $3 or more companies like ACE Cash Express charge to cash every paycheck. Instead, they can visit an in-network ATM or make point of sale purchases at a restaurant or grocery store. The cards function much like other prepaid debit cards in that respect, though funds can only be added by an employer.
Meanwhile, the cards are particularly attractive to employers, who spend millions generating and distributing paper checks for their workers each year. Generating a paper check costs a company upwards of $2 per check — multiply that across a network of 100,000 employees or more, and costs add up. Darden Restaurants, the parent company of restaurants like Olive Garden, saves nearly $5 million each year in operating costs by making payroll cards an option for its employees, according to a recent study. Companies partner with a large bank or payroll card service like J.P. Morgan Chase or FlexWage, who actually issue the cards and assess fees.
Employees in a variety of industries are paid via payroll card, but this innovation presents a particularly unique conundrum for restaurants. Because many restaurant employees are tipped workers, meaning that their paychecks include only the federally required $2.13-per-hour "tipped minimum" wage, fees associated with payroll cards can impact a proportionally higher percentage of their wage than a salaried employee. Which means that while payroll cards are often touted as a more convenient way for workers to get paid — especially those without access to banking services — these cards may create as many problems as they seek to solve.
Last week, an analysis from the Restaurant Opportunities Centers examined the use of payroll cards at Darden Restaurants, the largest restaurant-industry employer with 150,000 workers, and the results highlighted a concerning number of complaints among the 200 employees it surveyed. But it wasn't the first time this new method of payment has come under scrutiny. In 2013, the New York Attorney General's Office investigated whether or not use of the cards was a violation of state labor laws, and issued warnings that companies could not force employees to use the cards. Attorney general Eric T. Schneiderman also proposed the Payroll Card Act of 2014, which suggested stricter regulations aimed at reducing fees paid by workers in the state.
Also in 2013, former McDonald's employee Natalie Gunshannon sued two McDonald's franchisees after she was forced to use a payroll card to receive her wages. The case ultimately resulted in a class-action lawsuit involving more than 2,000 employees who worked at McDonald's locations owned by those franchisees (the litigation is still pending). Later, a judge ruled that paying employees through any prepaid card that incurred fees when workers attempted to withdraw funds was illegal in the state of Pennsylvania.
At present, more than 19 states have passed bills concerning the use of payroll cards, many of which are intended to protect workers from predatory fees. In 2014, Hawaii Governor Neil Abercrombie ordered that all public and private employers stop issuing payroll cards while the legislature debated a bill that would have officially made them legal for use in the state. The measure ultimately passed later that year, but with strict requirements that employees have free and unencumbered access to their funds.
"When you’re earning the federal sub-minimum wage, it can cost almost a full hour’s work just to check the balance on your card."
In ROC United's analysis, the chief concern among Darden Restaurants employees was the issue of fees, which range from 50 cents to $10. The fees can be assessed for everything from checking one's card balance or withdrawing cash at an out-of-network ATM to not using the card for an extended period of time. Even having a payroll card declined at the point of sale can result in a fee.
According to Mike Rodriguez, author of ROC United's report, the study found that employees could incur more than two dozen different types of fees while using their Darden-issued payroll card, which add up quickly for tipped workers. "When you're higher wage, maybe it doesn't impact you," says Rodriguez. "But when you're earning the federal sub-minimum wage, it can cost you almost a full hour's work just to check the balance on your card."
The cards also bring a host of financial inconveniences that are frequently accompanied by even more fees. If, for example, an employee needs to withdraw $1,000 to pay bills, most ATMs cap the amount of cash that can be withdrawn in each transaction at $500 — the employee would incur two ATM fees by the time they had enough cash to keep the lights on or pay rent. If an employee uses his payroll card to purchase gas at the pump, he can likely look forward to holds in excess of $75 or $100 until the transaction clears.
Then there's the issue of logistics. Darden employees can access funds on their payroll card via an in-network ATM for free, but Rodriguez found that the vast majority of employees he surveyed were unclear on what exactly "in network" means. "When I think about a traditional bank account, it's branded. I know what's in and out of network because of the logo, I know how to avoid fees," he says. "There's a network, but it's really hard to identify the ATMs that are in your network. Employees don't know there's a network, much less how to access it."
These issues culminate to real economic impact for employees. A $2 fee may not seem like much, but for workers living paycheck to paycheck, it can mean the difference between paying a bill on time and getting the utilities shut off. "Hiccups related to fees meant missing key bills and being charged late fees from the utility companies or landlords," says Rodriguez. "Or maybe they buy gas and don't know how much the hold is, go to make the transaction, and they're getting charged a POS decline fee. And this is supposed to be an easier way for them to access their wages?"
Darden Pushes Back
Rich Jeffers, director of communications for Darden Restaurants, completely disputes ROC United's findings. "I saw the study and took it for what it is. This is year five of their campaign against our company in which they release these so-called reports that have no statistical validity, their methodology is extremely flawed, and they're just trying to disparage our company," he says. "This isn't anything new. Pay cards are not something unique to Darden Restaurants, and they're not unique to the restaurant industry. We've been using pay cards since 2004."
The most important distinction for Jeffers is that employees at Darden Restaurants have a choice whether or not to use the payroll card. "Fifty percent of our employees elect to be paid by pay card; no one is forced," he says. "The other half choose direct deposit, two percent choose paper check. If, in fact, what ROC alleges were true, I highly doubt half of our employees choose a pay card." (Of the 200 employees surveyed, 26 percent reported that they were not given a choice to decline the Darden payroll card.)
"It’s emblematic of our diverse workforce, the flexibility that people enjoy in their jobs."
In his view, restaurant employees choose payroll cards for the same reasons that they choose restaurant work. "70 percent of workforce is millennials, so they may have another job or income coming into their bank account in different ways," he says. "They want the paycard to use as their spending money. There's any number of explanations for the way that people use them. It's emblematic of our diverse workforce, the flexibility that people enjoy in their jobs."
He also notes that Darden has taken progressive steps to eliminate some of the fees associated with the payroll cards that they use. As of next month, the company will no longer charge users a 50-cent fee when their cards are declined at the point of sale. The company will also expand its ATM network, increasing the number of in-network machines from 50,000 to 79,000 effective June 1. When asked to provide a full schedule of fees for the cards, Jeffers declined.
Considering the cost savings to companies, payroll cards aren't likely to go anywhere any time soon. In fact, their usage is expected to increase — according to the National Consumer Law Center, 12.2 million workers will be paid by these cards by 2019. Considering that Darden Restaurants is the largest full-service restaurant group in the country, other chains will no doubt be looking to replicate the cost savings and increases in efficiency that the cards can bring.
On Darden's part, the company maintains that it is continually working to improve the experience for their employees. "User experience is always something we are paying attention to. We employ people in all 50 states, so having a large number of ATMs is important to us, that's we're adding more," Jeffers says. "We looked at the fees that are out there, and we're having the 50-cent decline fee waived because of it. Our employees are our most important asset, we want to make sure we're taking care of them."
"This is an evolving technology, and the slippage comes when you try to implement it."
In Rodriguez's view, the issue isn't the card — it's with the implementation. "This is an evolving technology, and the slippage comes when you try to implement it with franchisees or lower-level managers," says Rodriguez. "There are uneven levels of access to information and transparency from both the corporations and the payroll card providers, and that impacts people." In an industry that employs a proportionally high number of non-English speakers and low-wage employees without consistent access to the internet, those challenges may be difficult to overcome.
More to that point, Rodriguez believes that restaurants have a great deal of training to do to ensure that the waitress who's pulling 12-hour shifts slinging Cheddar Bay Biscuits at Red Lobster knows exactly what she's getting into when she signs up to use a payroll card.
"Many workers do have a good experience with the card, they feel that it's a convenient way to get their wages," he says. "But you're supposed to be presented with options to use the payroll card or get direct deposit, and we found that they're often not given that option. When people push back and ask for direct deposit or a paper check, our research shows that a third of those folks are being told no or their requests die in the bureaucracy. It's unacceptable."
Amy McCarthy is a writer and editor in Dallas, from where she serves as editor of Eater Dallas and Eater Houston. She enjoys lipstick, cocktails, cooking, and fighting with celebrities on Twitter.
Editor: Erin DeJesus